Verizon: $350 ETFs are a good thing, and they help the poor

Verizon tells the FCC that its new jumbo sized early termination fees don't …

Verizon Wireless has replied to the Federal Communications Commission's letter of inquiry about its super-sized early termination fees for smart phones. The bottom line: $350 ETFs are good and good for you.

"This pricing structure enables Verizon Wireless to offer wireless devices at a substantial discount from their full retail price," the telco's 13-page statement (with 64 pages of documents) explains. "By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices. It thus enables many more consumers, including those of more limited means, access to a range of exciting, state of-the art broadband services and capabilities."

Budget busters?

Verizon is responding not just to the FCC's probe, but to the Senator on Capitol Hill who's been raising a ruckus about this issue since 2007. Earlier this month Amy Klobuchar (D-MN) introduced a bill to put the kibosh on "budget-busting" ETFs, as she calls them. The proposed law would ban early fees that exceed the cost of the handset to the provider minus the purchase price paid by the consumer at the start of the contract.

No surprise then that Klobuchar hit the roof when Verizon announced in November that its early fees for the termination of "Advanced Devices" (smart phone) contracts would double from $175 to $350. These gadgets include the BlackBerry Curve, Storm, and Pearl, the Motorola Droid, LG Dare, Palm Centro, and various netbooks made by Hewlett Packard and Gateway.

The new ETFs comes with a new pro-rating system—ten dollars sliced off the fee each month—that still leaves quitters paying over 100 bucks, even if they terminate at the very end of the two-year deal. Klobuchar sent a letter to Verizon president and CEO Lowell C. McAdam calling the hike "anti-consumer and anti-competitive," and asked the FCC to probe the telco about the move.

And so the agency did. The Commission appears to like sending out these sort of letters, having just completed an inquiry of Apple's rejection of Google Voice for the iPhone. Much of Verizon's response details how it lets consumers know that they're staring at a $350 ETF in the face (store disclosures, receipts, the sale confirmation letter, etc). But a big chunk of the statement is a defense of the practice in general.

Mobile service companies have long argued that early fees subsidize the difference in cost between what the company pays the manufacturer of a phone, and the retail price for the device that it offers consumers. Verizon says that this "cost differential"—"the difference between the amount Verizon Wireless pays manufacturers for the device and the price it charges to customers on term contracts"—is double for "advanced devices" than what it is for "basic devices."

Verizon also had to hike its advanced device ETFs, the letter claims, because it costs more to advertise and sell them. "It takes more time (and hence increases the cost to Verizon Wireless) for sales and customer care representatives to handle customer inquiries regarding the complex advanced features and functionalities of Advanced Devices," the company explains.

And then there's Verizon operating expenses and investments in broadband networks: "The $350 ETF does not fully compensate Verizon Wireless for all these costs, particularly for customers who terminate at a relatively early point in the contract term, but it helps the company recover at least a portion of them."

Browser bait?

The FCC letter of inquiry also expressed concern about a feature prominent in some of these Verizon networked devices: the company's Mobile Web browser, for which Verizon charges a usage fee. The service offers more or less what you can expect from a free Yahoo! account —e-mail, news, weather, sports—except at a usage rate. If you don't subscribe to a prepaid or unlimited data bundle, the cost is $1.99 per megabyte or a "fraction thereof," as VZ puts it, of monthly data use.

"Is there a minimum data amount or level of access that triggers charges, and if so, what is that amount or level?" the FCC letter asked. "Is it correct that customers are charged for minimal, accidental usage by customers using these phones?"

Verizon says the answer to the second question is no—or at least sort of no. Non-prepaid or data plan customers who navigate to Mobile Web's home page are not tithed. "If the browsing session ends there without the customer navigating to another webpage," the response explains, "the customer will not incur charges for Mobile Web browsing."

So presumably some wanderers will get dinged for clicking those "another webpage" links. But the statement doesn't really answer that first question about the minimum data charge, so we still don't know how much. The FCC's letter referenced a column by New York Times tech writer David Pogue, which includes a complaint from a Verizon customer about the feature.

"The phone is designed in such a way that you can almost never avoid getting $1.99 charge on the bill," the consumer wrote. "If you open the flip and accidentally press the up arrow key, you see that the phone starts to connect to the web. So you hit END right away. Well, too late. You will be charged $1.99 for that 0.02 kilobytes of data. NOT COOL."

Verizon responds that some of these mobiles can be configured to avoid that Web-connection feature, "but this option is not available on all Mobile Web capable devices."

When all is said and done, it is unclear where this goes now. Do Verizon's pricey new ETFs exceed Klobuchar's cost-of-handset minus purchase price formula? And behind the scenes of this discussion is a debate about whether the FCC should take the regulation of ETFs away from state governments and courts—a move that the telcos have supported and consumer advocates opposed.

Klobuchar's bill would not override any state level regulations affecting early fees. It's currently awaiting discussion in the Senate Commerce, Science, and Transportation commiittee.

Matthew Lasar
Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz. Emailmatthew.lasar@arstechnica.com//Twitter@matthewlasar

178 Reader Comments

The wireless carriers should have to disclose the true cost of the phone hardware they are subsidizing -- not the fake MSRP they advertise. They are *not* paying $599 for the phone so they are completely misrepresenting the discount you're getting with a 2 year contract. If they are only subsidizing the phone hardware by $200 I think a $350 ETF is a bit extreme.

Plus, the mass market has already dictated that they will only pay only about $200 for a smartphone. Verizon won't sell a phone without a bunch of tie-ins, but if they did I doubt they would get much sales of $600 phones.

It seems to me that after you finish your two years, since you have effectively paid back the subsidy, you should be able to continue your service at a lower rate. If you received a $350 subsidy over 24 months, you bill should go down $14.58/month. Carriers shouldn't be allowed to have it both ways.

Originally posted by SleepDirt:The wireless carriers should have to disclose the true cost of the phone hardware they are subsidizing -- not the fake MSRP they advertise. They are *not* paying $599 for the phone so they are completely misrepresenting the discount you're getting with a 2 year contract. If they are only subsidizing the phone hardware by $200 I think a $350 ETF is a bit extreme.

The ETF is what it is regardless of the actual phone cost. Don't like it? Then don't enter into a contract with terms you don't agree with. It really is that easy.

i have a phone where the "select" button is the web button when you are not in a menu, but when you are in a menu it is how you select what you want. i hit that button all the time outside of menus. there is no way to disable the internet on the phone and there is no way to re-assign that button even though you can re assign the rest.

So far as I have seen all the big wireless carriers in the US are jackholes looking to charge you for just about everything. T-Mobile was decent until they began charging users 1 minute when they let calls go to voicemail (and more minutes when voicemail was called to see what message was left). I challenge anyone to stay on their lowest priced plans when those rules are in effect. That being said I think as wireless companies go they're still heads and tails above the rest when it comes to business practices. If they were rolling out 3G services at a faster rate I would never consider leaving them.

ETF fees are one of the things that are so full of crap about US wireless companies. I've gladly paid the full price of a couple of phones now just to stay out from under the dreaded two year contract extension. I really hope the FCC cracks down on this BS. When someone pays $300 for a phone (ostensibly "reduced" in price) and $75+ per month between data and voice contracts, hitting them with an ETF just because they think your service is crap is just insane greedy overkill (though it probably keeps the CEO and share holders rolling in it with smiles on their faces).

Originally posted by Panick:ETF fees are one of the things that are so full of crap about US wireless companies. I've gladly paid the full price of a couple of phones now just to stay out from under the dreaded two year contract extension.

"Who's" is the contracted form of "who is" and colloquially the form of "who has", e.g., "the Senator on Capitol Hill who's been raising a ruckus..." It's not the best form for journalistic writing; "who has" is more correct, but at least it makes sense grammatically.

Originally posted by Ironman 2008:The only evaluation of contracts I do is to read and understand them before making a decision to enter in to them or not. That's the way it should be done.

Right. The idea that you might be able to negotiate a better contract if you understood something about what you were buying never enters into the picture. The information asymmetry that exists between the two parties to the contract you're signing doesn't bother you in the least. So long as they can avoid using words you don't understand in the contract text itself, that's good enough for you.

Originally posted by Ironman 2008:The ETF is what it is regardless of the actual phone cost.

As is the cost of bread at your local store. Of course, if the friendly shop keeper tries to charge me $200 for a loaf of bread, I'm gonna try to find out why.

Don't be a lazy consumer. You owe it to yourself to at least find out if the terms of the contract are at least fair before entering into it... Regardless of whether or not you "like" them.

If you don't believe the terms to be fair then don't enter into the contract.

Yah and if they all suck don't get a phone. And while you are at it if all ISP's suck don't get internet. And if all car manufacturers suck don't get a car. And if all grocery stores suck don't buy food. And if all retail stores suck don't get clothing. And if all.....my point being a phone is not a necessity but that doesn't mean that there shouldn't be rules put down to avoid the entire industry from concluding to be a bunch of money grubbing, overbearing douchebags. 30 cents for a text message....yah. Whatever.

Originally posted by Ironman 2008:Because I don't believe such asymmetry exists.

Ok, now we're getting somewhere. You originally asserted that the cost of a phone didn't matter, so long as you don't sign on to contracts you don't "like". But now it appears that you do realize the value of this information.

So... I'm not sure what you were trying to say in your original post (perhaps you thought SleepDirt was advocating something other than what he stated?) but yes, assuming one is able to make an informed decision, I'll agree that it's important to read and understand contracts before signing them.

You can buy an Itouch 32gig for $250 at Amazon. Itouch is the same as an Iphone except with some things disabled so it will not compete. IMO Apple would sell it for $300 or less to users if they did not have to lock-in to AT&T or whatever service you would have to use in order to get to the customer. The way it is now: it is anti competitive and not good for the consumer or the markets ability to innovate.

Originally posted by Ironman 2008:Because I don't believe such asymmetry exists.

Ok, now we're getting somewhere. You originally asserted that the cost of a phone didn't matter, so long as you don't sign on to contracts you don't "like". But now it appears that you do realize the value of this information.

I don't believe the cost of the phone matters nor do I think knowing it has any tangible value.

quote:

So... I'm not sure what you were trying to say in your original post (perhaps you thought SleepDirt was advocating something other than what he stated?) but yes, assuming one is able to make an informed decision, I'll agree that it's important to read and understand contracts before signing them.

The "informed decision" you're referring to should be: Am I willing to pay the price they're asking? That's it. Knowing how much they paid for it should be irrelevant to the decision.

Originally posted by Ironman 2008:The "informed decision" you're referring to is should be: Am I willing to pay the price they're asking? That's it. Knowing how much they paid for it should be irrelevant to your decision.

You're going in circles. If the only choice you believe in having is between asking price and nothing, then what were you doing negotiating a better price on your T-Mobile phone? Assuming you're full of it, and there is some value in looking beyond the first quote, then any information on how that quote is calculated is valuable to you in your quest to get a better contract...

Originally posted by Ironman 2008:The ETF is what it is regardless of the actual phone cost.

As is the cost of bread at your local store. Of course, if the friendly shop keeper tries to charge me $200 for a loaf of bread, I'm gonna try to find out why.

Don't be a lazy consumer. You owe it to yourself to at least find out if the terms of the contract are at least fair before entering into it... Regardless of whether or not you "like" them.

If you don't believe the terms to be fair then don't enter into the contract.

Except that their claim for the legitimacy of the ETF is based on covering the cost of the phone. If disclosure gives lie to that, then many customers that might have otherwise been happy with that reasoning might now demand better pricing.

The ETF is generally fair game, IMHO, if the service is good. You pay a hundred bucks up front for a $600 phone, and they give you this huge discount because you will pay for overpriced cell phone coverage for two years or more. Even after the phone's been paid for (which is never really agreed upon, but let's say the two years that they say) you continue to pay those outrageous prices, but it's no cheaper anywhere else that has the same level of service. Oh, I could go to T-Mobile and save $20-$30, but I like having service everywhere, not having to walk outside and down the road in below-freezing temps to find wireless signal. So I pay for US Cellular. Hands down the best cell coverage you can get. But their rebates are a scam, repair is overpriced, customer service is a joke, and they're expensive. Yet they don't need ETFs because their customers wouldn't dare go anywhere else. (They do have them, they just don't need them.)

I agree with Ironman and I've seen him in another topic about ETFs. If you don't like a contract, you don't have to enter into it. It really is that simple. You can get a TracFone or other month-to-month phone, but you pay a lot more for your minutes than a contracted customer. Still, if a contract doesn't meet your needs, e.g. you only intend to have it a few months and/or you only want calling features and maybe text, TracFone is fine. But if you want a smartphone, either buy it outright and negotiate an ETF-free contract (shouldn't be hard) or deal with the ETF. It's not an issue if you keep up your end of the deal. (Although, going back to US Cellular, some services, such as them, won't activate a smartphone you didn't buy brand-new from them, so that leverage might not work with your carrier. Check first.)

Originally posted by Ironman 2008:The ETF is what it is regardless of the actual phone cost. Don't like it? Then don't enter into a contract with terms you don't agree with. It really is that easy.

Since wireless carriers are using our public property (wireless spectrum) we have a say in how they run their businesses. I'm glad the FCC is looking into this issue on my behalf. If you choose to buy an unlocked phone at its inflated MSRP price you're just getting screwed up front instead of over a period of 2 years. As such most people prefer the 2 year screwing over the big one time screwing. It's an illusion of choice. If you buy an unlocked phone and signup for a service contract you pay the *same price* as someone with a subsidized phone. Is that fair? They are putting business practices in place to stop free market competition. When LTE arrives and we have technical compatibility among all the major US carriers the FCC will be free to mandate some sane regulations on unlocked phones. Until then I think the best thing the FCC can do is mandate that carriers disclose the actual price of the hardware they are subsidizing so customers can make a more informed choice. Right now they can cite a completely fraudulent number and misrepresent the value of contract service.

I fully support an ETF of $350, since you'll be paying the full cost of the device. I do NOT support the fact that in month 23 of your contract, it costs you $100 to cancel it. That bit makes it simply obvious that they want to use the ETF to lock you into your contract, and penalize you for not finishing it.

Were the ETF pro-rated so that it's $350/24, that would be more fair, but of course, Verizon would NEVER do that!

You can buy an Itouch 32gig for $250 at Amazon. Itouch is the same as an Iphone except with some things disabled so it will not compete. IMO Apple would sell it for $300 or less to users if they did not have to lock-in to AT&T or whatever service you would have to use in order to get to the customer. The way it is now: it is anti competitive and not good for the consumer or the markets ability to innovate.

Mydrrin.

Dude, notice how the iPod Touch is thinner than the iPhone. That's because stuff is MISSING. It's not "disabled". It just isn't there!

What bull are all the wireless carriers giving people? The company gets the phones from the manufacturers. The manufacturers offer a kick back for every phone sold by the carriers. This kickback is never disclosed. The carriers offer a commission to the dealers for selling the phones. The commission is subject to a chargeback to the dealer if the customer cancels. Lets figure this out. The phone costs 400 dollars. The dealer sells the phone for 99.99. The dealer gets a commission for the rate plan, a commission for the data plan and any perks that come along by the carrier and or the manufacturer. The customer cancels after 5 months. The carrier charges the dealer back all his commissions. The carrier then hits the customer for a termination fee. Who is losing out? The customer loses because he or she has to pay the cancellation fee. The dealer losses because he lost all his commissions on that customer. The carrier wins because they got all their money back that they paid the dealer for making the sale and they get to charge the customer back for canceling their rate plan with them. The carrier still keeps the perks that the manufacturer gave them because that is how the deal was done. Manufactures pay the phone companies to sell their phones! They raise the price of their phones to the carrier and then they give them kickbacks. Did you ever wonder why certain carriers sell certain phones and others don't? I phone is the only carrier that is making the big bucks. If all these carriers are losing money then how are they staying in business? The rate plans used to be over 120 dollars a month to people now they are around 50. and thats with an unlimited plan!

You can buy an Itouch 32gig for $250 at Amazon. Itouch is the same as an Iphone except with some things disabled so it will not compete. IMO Apple would sell it for $300 or less to users if they did not have to lock-in to AT&T or whatever service you would have to use in order to get to the customer. The way it is now: it is anti competitive and not good for the consumer or the markets ability to innovate.

Mydrrin.

Dude, notice how the iPod Touch is thinner than the iPhone. That's because stuff is MISSING. It's not "disabled". It just isn't there!

Ironman: I don't suppose you've you heard of something called consumer rights?

Every individual shouldn't have to waste significant portions of their own valuable time reading the fine print of every contract... that's what regulation and the government is for -- to make sure corporations aren't cheating honest citizens.

ETFs (2 year contracts) are frakked up in my opinion... as is locking-down phones, and as is charging outrageous rates for kilobytes of usage (like mentioned in the article, or another example is text messages).

Not to mention that they extend your 2-year contract often without even telling you. My family members have called Verizon to make a change to their plan (over the phone) and it resulted in the signing of another 2-year contract... and they were never told about it. Also, each phone on a single plan has its own contract, so if you want to switch providers without a huge fee you have to wait for every phone to have gone off the contract.

I don't see how that isn't a violation of consumer rights.

Not to mention that many of the phones offered by Verizon have ridiculous prices if you don't sign-up for a contract. And they suck too. On eBay you can get an iPhone for like $300-350, which completely destroys anything Verizon offers (except the Blackberry's/Droid).

1. Carriers should be required to have a separate line item charge to pay off subsidized phones of any type, where the consumer is required to pay the remaining amount of the subsidy if they choose to leave before the subsidy has been paid off. And the consumer no longer has to pay it once it's paid off.

2. Why the hell does Verizon need customers leaving their service to pay for network upgrades that haven't even been installed yet? This only makes sense if Verizon has planned massive network upgrades, but expects a whole lot of people to leave their network. Right now, they are large enough, and their market share is fairly stable for them to plan for their network upgrades to match their subscribers including churn. Their argument that they need ETF money for network upgrades is just about being a raw money grab that goes straight to that quarters profits, not network upgrades.

Originally posted by kindakrazy:1. Carriers should be required to have a separate line item charge to pay off subsidized phones of any type, where the consumer is required to pay the remaining amount of the subsidy if they choose to leave before the subsidy has been paid off. And the consumer no longer has to pay it once it's paid off.

This sounds like the most reasonable suggestion so far. If the ETFs and their amounts are truly fair, prove it by showing the math. Right now the figures are very cloudy, and I'll bet anything that it ain't in the favor of the customer.

Originally posted by Ironman 2008:Don't like it? Then don't enter into a contract with terms you don't agree with. It really is that easy.

Actually, given that the phone company exists purely thanks to a government granted monopoly on specific portions of public property as well as significant historical tax breaks or outright grants, along with the structural information and power asymmetry that exists in the relationship, I think I'd prefer to write my Congressmen and ask them to deal with the problem.

If you hate the Free Market so much Ironman that's certainly your business, but don't expect all of us to simply role over and take the easy, lazy route like you do. Some of us care about our country and the quality of life we have here.